Is Amazon Prime Still Cost Effective With a $20 Price Increase?

Daniel Kline, The Motley Fool

Published 6:43 am, Thursday, April 17, 2014

With Amazon raising prices in the United States for its Prime service from $79 a year to $99 a year today (April 17), existing and potential subscribers are likely to give some thought as to whether the service is a good deal.

That question can be definitively answered for people who sign up for the service solely because it offers unlimited free two-day shipping to members on any items Amazon sells directly. For those customers it's a simple math problem that Slate has created a widget for. The widget goes by the assumption that each Prime-eligible shipment costs non-Prime subscribers a minimum of $3.99 (actual costs can vary). To bring your average cost per shipment below $3.99, a customer would have to place 25 eligible orders in a year. That would bring the cost to $3.96 per shipment, according to the widget, making the $99 up-front investment at least nominally worth it.

At the old price of $79 it would take only 20 orders to bring your cost to $3.95 per order so the value point where the service is worthwhile has increased by five orders.

Of course Prime members also get free access to Prime Instant Video -- a sort of Netflix-light that includes movies, television shows, and a number of original programs. The value of that service can certainly be a tipping point for people on the fence about ordering Prime (or those who are unsure if they will order 25 times), but the value of the video service is heavily dependent on whether the potential subscriber will actually use it.

Amazon benefits from having more Prime members

Amazon wants people to join Prime because it encourages them to place more orders. Market research firm Consumer Intelligence Research Partners estimated that in 2013 Prime members may spend more than twice as much — $1,340 per year – than non-Prime members using Amazon, according to the Wall StreetJournal.

Mark Rogowsky writes about Amazon for Forbes and he addressed the risk to Amazon in a column that was posted right after the increase was announced.

"Prime becomes a habit, leading to much higher spending with Amazon," he wrote. "The company is basically concluding that it will collect $20 extra from everyone and lose virtually no Amazon orders from anyone. If even a few percent of customers drop Prime and place even slightly fewer orders through the year, Amazon might end up losing out on enough gross margin to negate whatever benefit the extra $20 per remaining Prime customer brings."

Amazon CEO Jeff Bezos acknowledged in his 2013 letter to shareholders the benefits to the company of what he described as "tens of millions of Prime members worldwide," noting that they are ordering more items across more categories than ever before.

By raising the price of Prime, Amazon risks losing some of its best customers. But if you're spending $1,340 per year on the site it's hard to imagine you're not at least close to 25 orders.

Will customers drop Prime?

Clearly some customers are considering dropping Prime -- a user forum on Amazon's website has over 2,000 posts on the topic "Who else is canceling Prime and reducing overall transactions with Amazon?" There are numerous other discussion threads on the site that discuss the idea of canceling but for a service that likely has over 20 million subscribers (Amazon does not report the exact number) the chatter is relatively quiet.

The real danger for Amazon is the casual user who had a Prime membership on auto-renew that he or she never gave much thought to being pushed to cancel because the new price reminds him or her how little he or she has used the account.

The other danger Amazon faces is customers who used to buy a lot of physical books examining their buying habits and realizing that switching to an e-reader made Prime less of a value for them. Those customers may cancel Prime, but if they are already buying electronic books in the Amazon ecosystem they are likely to stay customers. Amazon may lose some revenue on those customers if they stop buying non-e-book items from the site but they will at least remain customers.

Prime is a pretty clear proposition

If you order from Amazon every other week or more Prime is clearly a good deal. If you order less than that -- say monthly -- but use Prime Video regularly the service may still be a good deal. If you use it less than 25 times a year and don't use Prime Video, canceling (or not signing up in the first place) is an option as is looking for ways to buy more from the online retailing giant.

Amazon is not always cheaper than local grocery stores or department stores but it often is. In some cases justifying a Prime subscription could be as simple as committing to ordering more from Amazon, which would not only make the subscription worth it but should also save you money.

The question of whether Prime is worth it really comes down to answering "do you place 25 orders a year or can you see yourself doing so?" If the answer is no and you're not using Prime Video then cancel or don't join. If the answer is yes than fork over the extra $20 and join up for another year.

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Daniel Kline has no position in any stocks mentioned. He is a Prime member who orders more than 25 times a year from Amazon. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.